I am one of three founding partners in a fourteen lawyer firm in Cleveland, Ohio. We are an insurance defense firm with three founding partners, five non-equity partners, and six associates. We have three primary insurance companies that refer a majority of cases to the firm. All three of us founding partners are in our early to mid sixties and contemplating our retirement and departure from the firm in the next five to eight years. Our lease runs out in eight years and none of us want to sign another lease. Three of our non-equity partners are in their mid to late fifties and two are in their forties. All of our associates have less than five years experience. When and how should we begin planning for our retirements and exits from the firm?
I suggest that you start now, especially if you are planning on an internal succession strategy. I believe that an internal succession should be your first step if you have the right people in place. When a firm has institutional clients such as you do with many different relationships within each client organization it can take time to transition relationships to the next generation of attorneys in the firm to ensure that clients stay with the firm when you retire. Transition to the next generation of attorneys usually involves legal skill development, management skill development, and client transition. We often recommend five years.
If you are looking for a buy-in for new equity partners you need sufficient time so new equity partners can pay for their initial ownership interests over time and acquire additional interests as they can afford to acquire more. Waiting too long can also create a situation where non-equity partners in the firm feel they can simply wait your out and inherit the clients without paying anything, or very little, for their ownership interests or buy-in/buyouts. Consider making a few folks minority equity partners as soon as you can.
This assume that any of your non-equity partners even want to be equity partners in the firm which is often the case these days. Three of your non-equity partners may also be close to retirement themselves and have no interest in stepping up to equity. If this is the case you will have to focus on the other two non-equity partners. I would begin a dialog with all of your non-equity partners to determine their interest level. At some point you will not really know until you present them will a proposal and appropriate financial information – initial buy-in if there is to be one and founding buy-outs if there is to be such.
If it looks like the interest or commitment level is not there in your non-equity partners you may have to consider an external option such as a merger. The timeline often can be much shorter in such situations.
John W. Olmstead, MBA, Ph.D, CMC